Waltzing to a mineral boom

By
Ron Scherer, Business and financial correspondent of The Christian Science Monitor /
July 27, 1981

Canberra

"Roo-bucks." That's what the Australians call the money now bouncing to their resource-rich country. Exactly where that wave of foreign investment will take the "lucky country," as it's known, is open to debate. But for the moment it's a heady experience for the Aussies, participating in the second wave of resource development to break over the country in the last 15 years.

As one Aussie put it, "It's like surfing down a wave; you don't know when it will break, but it's great fun while it lasts."

In the past fiscal year, ending June 30, some $6.85 billion ($6 billion Australian) has flooded into the country -- an increase of over 500 percent from the previous fiscal year -- to help finance the new coal mines and aluminum smelters. More is expected since $33 billion worth of capital projects are slated and 130 mining projects are currently under consideration or construction.

Even if a portion of these projects are scrubbed -- and there are already signs some of the aluminum smelters are being scaled back -- Australia will still look like a construction company's dream.

According to the federal treasurer, John Howard, in this fiscal year alone some $13 billion worth of capital projects will break ground. Real investment by business increased by 20 percent in the past fiscal year and this year's growth is expected to at least equal that feat again. In the prior five years, real capital spending increased by only 1 percent per year.

This new wave of investment is mainly energy related. Draglines are gouging coal out of the earth in Queensland and New South Wales; and aluminum pot lines are bellying up to power plants in Queensland and Western Australia. The Northwest Shelf project is preparing to ship vast quantities of natural gas first to Perth and later to Japan as liquefied natural gas. Uranium mines are opening up in the Northern Territories and Queensland. Drilling for oil is picking up again in the Bass Strait and Western Australia.

Politicians from the state governments are arranging trips to Japan and the US to sell foreign investors on Australia's "cheap coal power," as they price the cost of their electricity far under world levels. Pundits call Australia the "Pacific power station," as ships queue up in harbors waiting to load steaming coal to power the factories of Yokohama and Seoul.

Unfortunately, there is another aspect to this tidal wave of investment.

Points out Heinz Arndt, professor of economic research with the School of Pacific Studies at Australian National University, the influx of foreign capital , combined with a strong Australian dollar -- which is attracting speculative money -- is putting pressure on the money supply target of between 9 and 11 percent.

To counter this pressure, the government has continued to ease the upward pressures on the Australian dollar through active intervention in the exchange markets. However, this policy has its political liabilities since many exporters, particularly in the farm sector, have contracts linked to the US dollar. Internally, there is also pressure to keep interest rates down since home ownership is considered a constitutional right in Australia and mortgage money must be readily available.

The new projects also present "a danger of overheating the economy," admits Sen. John Carrick, the minister for development and energy, adding, "We must have a stable economy and a lower inflation rate than our trading partners."

The government is expecting 4 percent real growth in nonfarm gross domestic product (GDP) this fiscal year, ending June 30, the highest level of economic activity in seven years. (The first quarter showed a total GDP growth of 4.3 percent, with nonfarm products gaining 5.6 percent and farm products dropping 13 percent due to the prolonged drought.)

Economic forecasters are predicting a 10 percent inflation rate for the Aussies as long as wage demands are not exorbitant.Last year, real wages rose 2 to 3 percent, worrying some businessmen. "If this trend persists," says Ray Pelham-Thorman, executive director of the Australian Chamber of Commerce, "it could be dangerous since it could make Australian industry less competitive."

Faced with the danger of a spiraling inflation rate, the government has clanked into action. Prime Minister Malcolm Fraser has turned his stern demeanor toward those companies which agree to a 35-hour workweek. And he has threatened monetary and fiscal retaliation for labor settlements he feels the country cannot live with.

There is also a growing feeling that the independent Arbitration Commission which was set up to try to smother some of the industrial strife in the country, should be abandoned. The commission gives workers in all sectors two pay raises a year, based on the cost of living, without consideration of productivity.

At various times the unions have threatened to scrap the whole system. Some critics contend the system has inhibited teh free flow of labor since it tends to diminish the pay differentials between skilled and unskilled labor. Economists also point out the independent craft unions have not braked their wildcat strike activities which often are nonwage related.

At the same time, bankers outside the county are pressing the government to lower tariffs and import quotas, a move that would likely cost some jobs in the less than competitive manufacturing sector. However, it could also ease inflation strains.

And, in a more subtle move, the government since May has selectively delayed making decisions on new projects involving foreign investors. This has irked the individual states, which often have an acrimonious relationship with the federal government in the nation's capital of Canberra anyway.

However, the states are stuck with a federal presence even if it galls them. The Federal government collects most taxes and doles out the proceeds, less federal expenses, to the states. Since the government is trying to cut its expenditures, led by a budget cutting group of ministers called "The Razor Gang, " the states have had frequent feuds with Mr. Fraser, the hard-nosed Liberal/Country Party coalition prime minister. "I'm tired of going down to Canberra, cup in hand," says Johannes Bjelke-Petersen, Queensland's colorful premier, "begging and pleading every other year."

The states want new projects in order to create jobs. Although the unemployment rate was 6.1 percent in May 1980, it has been improving and was 5.4 percent this May. Still, as the premiers are aware, youth unemployment is a major problem in Australia.

Ironically, at the same time, Australians are expecting a shortage of skilled labor for the new projects. Ian McPhee, minister for immigration and ethnic affairs, says the prime shortages will be in middle engineering jobs, building trades, and computer people. Tradesmen in New Zealand are finding the lure of high-paying Australian outback jobs enticing since no visa is required to cross the tasman.

Foreign investment is not universally popular. Paul Keating of the Australian Labor Party, the opposition party that was in power from 1972-75, contends "capital inflows become addictive." He adds, "the government doesn't understand you have to let foreign capital in on your own terms -- economic nationalism, I say, instead of Laissez faire."

However, Mr. Howard, the federal treasurer, believes that if the government "achieves the right balance" between foreign and domestic investors, hostility to the foreign investors will be swept into the Tasman Sea. Mr. Howard points out, "Australia has a history of being a capital-hungry country. Foreign investors must follow Australian rules, which are simply a 50 percent Australian participation in any project except for uranium mining, which requires a 75 percetn Australian participation.

Although most Australian businessmen are pleased and profiting from the boom, Robert J. White, chief general manager of the Bank of New South Wales warns: "There exists a real danger that Australia may come to base its future prosperity too heavily on a handful of primary commodities. As recent Dutch and British experience has shown, the possession of big resources of any product, even energy, can lead to the decline of other industry with adverse consequences to long-term employment and economic growth." Thus, the banker is urging the government to provide "a background" in which the private sector is encouraged to expand without undue regulation and in a competitive environment.

Canberra politicians are not unaware of the business demands. Mr. Fraser likes to tell visitors that his government is aiming for a greater degree of free enterprise. It's the lure of this promise, combined with Australia's mammoth natural resources that keeps the "Roo-bucks" coming into the continent.